Everyone is talking about gas this past week, and for good
reason. The price at the pump has been tearing higher. According
to the papers this morning the national average price for regular
gas is $3.65. Unfortunately for me, the price the media is
spouting has nothing to do with my cost. As of this morning, my
local gas guy is charging $4.85 for premium fuel, and that’s the
stuff my car uses.

I doubt the numbers being bandied about regarding prices at the
pump actually reflect the real economic consequences.

I'll probably take some flack for this, but I believe it's true.
The only thing that matters is the price of gas in California and
New York.

The USA has evolved into a two-tier gas market. The supply of
crude from Canada and the Bakken fields has created a lower cost
of supply for the central portion of the country. This
differential is most notable in the market spread between WTI (a
futures contract that settles physical delivery in Oklahoma) and
LLS (Louisiana Light Sweet Crude) - the pricing of crude for the
big Gulf refineries.

These charts show the WTI and the LLS pricing over the past year.

While both crude prices have risen significantly of late, what
jumps out is that the LLS pricing broke through the highs of
ten-months ago, while WTI has not.

Consider this map of the country. The green area is where the
Canadian crude is helping to keep prices lower. The dark red
areas are those that are dependent on the high-priced, imported
crude.

Gas prices are north of $5 in southern California today, but they
are as low as $2.95 in Ft. Collins Colorado.

While this may make the folks in Colorado and North Dakota happy,
it will crush the national economy. It doesn’t matter what
happens in Co. or N.D., they have (relatively) no cars.

A few years ago, the Highway Transportation Department put out a
report on registered vehicles by state. The total of all
registered vehicles was 244,000,000. Of that total, 33 million
were on the roads of California (13%), only 1.8 million (0.75%)
were in Colorado, and a measly 700k (0.25%) are in North Dakota.
The total of vehicles on the road in the states that are in red
in the above map comes to 137 million. Fully 56% of all vehicles
are in high cost states. Only 15 million vehicles (6% of total)
are registered in the green states!

-Crude prices in Louisiana hit their highest in a year on Friday.
If this level is sustained (or heaven forbid increases), the
price of fuel in the red states will go up by 50 cents in the
next few weeks. Forget about $4, start worrying about $5.

-California and NY will be hit the hardest. These two states
represent 21% of GDP. It will be a big burden for the NY
economy. For California, it could be a crushing blow. The
national economy cannot expand without California growing. Cali
is a very big portion of the pie.

-Given these facts, I wonder if the Administration is planning to
release more oil from the Strategic Reserve. I bitched and moaned
about this last
July when the SPR was tapped. Following the June SPR sales,
there was a multi-month drop in crude prices.

The SPR sales had little consequence; the drop in crude reflected
a slowdown in global growth and an easing of concerns regarding
Libya.

The Administration may look at the same charts as I did and
conclude that it was the SPR sales that broke the market for a
while. Folks who like to intervene in markets are biased to
believe their intervention "works". This
Administration would love to push down crude prices for another
three months. It would take the gas story off the front page. It
would help the economy from running into a wall.

This being an election year, it's possible that Obama will try an
SPR sale. If gas is $5 in November, anything could happen.

If there were an SPR sale, any beneficial impact on prices would
have a half-life of about 48 hours. This ain’t June 2011. If we
should we see an SPR sale (low probability), buy that dip.

-The LLS crude price tracks Brent crude. (A tanker can go to
Rotterdam or Louisiana, it will go to where the price is the
highest.) If there is a Middle East supply disruption, it will
affect Brent more than WTI. But for the red states, gas prices
will track Brent.

-Greenspan remarked in July of 2010, “The economy
appears to have hit an invisible wall”. Bernanke
reacted a few months later with his Jackson Hole speech that
brought us QE2. In the Summer of 2011 the economy hit another of
those “invisible walls”. Bernanke delivered TWIST and Perpetual
ZIRP. I wonder if Ben will try QE3 if the economy hits another
those walls due to rising gas prices.

The thing is, if Ben tried another form of QE/LSAP the price of
crude would be up $20 in a week. Bernanke is another of those who
likes to intervene in markets. He also thinks it
“works”. It won’t work this time; it will blow
up in his face.